The real problems concerning future oil production are above the surface, not beneath it, and relate to political decisions and geopolitical instability.
The quick rise of tight oil in the United States and Canada is dominating oil patch chatter as players take stock of what it could all mean — are we on the verge of a global energy revolution, or on a trend that is encouraging, but unlikely to meet lofty expectations?
Tight oil is unconventional oil resources extracted by horizontal drilling and fracking technologies.
With production in the United States gushing out of the Bakken and lots of potential in the Eagle Ford and 20 other plays, Canada barely getting warmed up, and other countries looking to copy the North American experience, optimists envisage the biggest game changer for the energy sector in decades.
By offering North America a shot at energy independence, there’s talk of vast political implications, including a new U.S. foreign policy free of Middle East strings and less urgency to find/subsidize alternative fuels. Some argue the growing importance of tight oil could even shine a new light on Canada’s oil sands in the eyes of Americans because they make energy independence achievable.
Robin West, chairman and chief executive officer of PFC Energy, a global consulting firm that specializes in oil and gas, has gone as far as branding the shift as the energy equivalent of the fall of the Berlin Wall.
Companies of all sizes are repositioning themselves, learning how to produce it or buying up those who know how. Investors love the possibilities. New hot spots are emerging and old ones are being revived. Centres such as Calgary are seeing an influx of foreign operators, from the Chinese to the Russians, wanting to get in on the secrets.
But as more is known about tight oil, whose track record as a mainstream movement spans barely of a couple of years, skeptics are emerging, too. They question the new resource’s staying power and whether the North American experience can be easily translated elsewhere.
It wouldn’t be the first time that aggressive forecasts turn to disappointment. Remember coalbed methane? How about Russia’s energy promise? We are still waiting for the next big thing from Canada’s East coast offshore, and energy from the Canadian Beaufort Sea remain a mirage.
So far, tight oil has added about 700,000 b/d of production in the U.S. In Canada, it’s making up for declining conventional production.
A new study by the Belfer Center at the Harvard Kennedy School reflects the bullish view. Author Leonardo Maugeri estimates tight oil fields in the U.S. could push out 3.5 million barrels a day by 2020, raising overall U.S. production to 11.6 million barrels a day, which would put it second to Saudi Arabia as a top world producer.
“The initial American shale play, Bakken/Three Forks in North Dakota and Montana, could become a big Persian Gulf producing country within the United States. But the country has more than 20 big shale oil formations, especially the Eagle Ford shale, where the recent boom is revealing a hydrocarbon endowment comparable to that of the Bakken shale,” he writes in a paper entitled “Oil: The Next Revolution, the unprecedented upsurge of oil production capacity and what it means for the world.”
With most tight oil plays profitable at oil prices in the US$50 to US$60 per-barrel range, Mr. Maugeri argues they are resilient to a significant downturn in oil prices. As technology develops, costs will come down, turning today’s expensive oil into tomorrow’s cheap oil.
Moreover, he believes other countries will emulate the U.S. experience, uncover new tight oil fields and boost recoveries from old ones by applying the same technologies – a combination of horizontal drilling and hydraulic fracturing.
“Oil is not in short supply,” he writes. “From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no ‘peak oil’ in sight. The real problems concerning future oil production are above the surface, not beneath it, and relate to political decisions and geopolitical instability.”
The study, which involved a field-by-field analysis of most oil exploration and development projects around the world, says an unparalleled investment cycle in the industry that started in 2003 increased production capacity almost everywhere, resulting in a “deconventionalization” of oil supplies. Four countries show the highest potential for production growth: Iraq, the U.S., Canada and Brazil.
With only one, Iraq, located in the Middle East, Mr. Maugeri says the Western hemisphere is on its way to becoming the new centre of gravity of oil exploration and production.
But many others urge caution before jumping to conclusions.
Research by the BlackRock Investment Institute argues the U.S. shale boom is unlikely to spill to other countries or affect world energy supply in the near future.
“Shale reserves abound around the world, with vast deposits in countries such as China, Argentina and Poland,” the institute, a unit of BlackRock, the world’s largest asset management firm, says in the paper “US Shale Boom: A Case of (Temporary) Indigestion.”
“But the scale and speed of the U.S. boom is unique and cannot be easily replicated elsewhere,” the paper says. “Reasons include well-documented and cooperating geology, an experienced and competitive exploration industry, and well-established ownership and property rights.”
In an interview, co-author Ahmad Atwan, a senior member of BlackRock’s global private equity team, said boosters are overlooking that there is little knowledge about tight oil outside North America and it takes a long time to figure out the geology and how to produce it.
“People forget that shale gas and shale oil were pioneered by Mitchell Energy, which got acquired by Devon Energy, in the 1980s, and people even knew about it in the 1970s,” he said from New York. “So even in the U.S. it took us 30 years to get to where we are. And we can assume that it can be more rapid in other places, because people can learn from what happened in the U.S. and Canada, but it’s not going to be a three or four-year learning curve.”
Mr. Atwan said it’s telling that even as every one is talking about tight oil, the oil majors (BP, Chevron, ConocoPhillips, Exxon Mobil, Shell and Total) are spending 47% of their capital in 2010 to 2013 on offshore and deep-water fields in such places as Brazil, West Africa and the U.S., because that’s where they see possibilities for discoveries. (By comparison, Canada’s oil sands are capturing 5% and onshore North America is getting 15% of their investment).
Tight oil, while significant, will help make up for declines from conventional fields, rather than result in a boom in world oil production, he said.
The other overlooked aspect is that tight oil is capital intensive and initial production declines rapidly.
Michael Tims, chairman of Calgary-based energy investment bank Peters & Co., has crunched the numbers and doubts some of the very optimistic projections for North American oil production growth.
In Canada, and in many U.S. fields, production from tight oil fields declines by 65% the first year and by a total of 75% within two years, he said. With such steep declines, producers have to invest in new wells every two to three years just to keep production levels flat.
For example, the brokerage estimates that up to $15-billion has been spent by industry to add approximately 500,000 barrels a day of production from the North Dakota Bakken region. To add three million barrels per day of production from fields across the U.S., it would require $75-billion to $100-billion of capital spending every couple of years. Contrast that to the oil sands, which require bigger capital expenditures up front, and then a lower level of maintenance capital, but the projects produce for 30 to 50 years.
“For those who make very optimistic projections about the additions to productive capacity, are they thinking about the amount of capital that is going to take, especially in light of the decline rates being experienced in the reservoirs now being developed?” Mr. Tims asks.
That’s not to say tight oil isn’t profitable. Many tight oil projects achieve payout of the capital invested very quickly because so much of the economic value comes out in the first year, he said. According to Peters & Co. estimates, a median tight oil project is economic, with a 10% rate of return, at around US$52 a barrel.